Ultra Trades, Yen, and Real Estate

Don’t allow the media barrage of negativity to keep you from cashing in on these amazing times. Leave the paralysis to others. Take action to get ahead.

The S&P; 500 is down 39% in the last year despite yesterday’s fabulous 11% rally. I’ve written extensively about the importance of scaling into solid, long-term positions via both individual stocks and index ETFs of both the plain and leveraged variety. I’m not going to re-hash that point today.

Instead, I have three other areas of finance that offer excellent opportunities for the bold: a trading tip for ProShares financial ETFs, a currency tip for those holding yen, and thoughts on real estate.

One of the most volatile areas of the stock market has been the financial sector. It has, therefore, provided some of the best trading moments. Traders don’t care whether movement is up or down, just that it’s there and preferably big. It’s been gargantuan in this sector for the past two months.

ProShares offers both Ultra Financials (UYG) and UltraShort Financials (SKF). UYG delivers 200% the return of the Dow Jones U.S. Financials index and SKF delivers 200% the inverse of the same index. When the financials go up 10%, UYG goes up 20% and SKF goes down 20% — in theory.

It seems then that the right trade is to buy UYG when financials are oversold and switch to SKF when they’re overbought. I realize that different traders define oversold and overbought in different terms, and some hate the terms altogether. Here, what I mean is that the ETFs have reached the low or high end of their recent trading ranges by whatever measurements one uses to monitor that. I personally like MACD and RSI with an eye on sentiment for confirmation.

Some readers wrote to me last night saying they noticed SKF providing more extreme movements in both directions. It’s provided better quick profits even in the long direction. On up days, holding SKF short has provided better gains than holding UYG long. They should return the same amount.

It’s hard to get one’s head around this because shorting SKF means that you’re short the short position in order to be long, but it works. Look at yesterday:

+17% UYG
-24% SKF

If the two worked perfectly, then SKF should have posted a 17% loss, not a 24%. So, shorting SKF at its highs would have been more profitable than buying UYG at its lows.

In a quick look back, however, I found that this isn’t always the case. Look at Oct. 10:

+13% UYG
-13% SKF

That was just what we’d expect. What about longer periods? Here’s the July 14-23 rally:

+51% UYG
-43% SKF

In that one, UYG was the better way to go. I don’t see that there’s much point rolling dice on which one’s going to track better on which market movement. I’d keep it simple by just owning UYG when you think financials are going up and owning SKF when you think they’re going down.

Onto yen.

I’ve advised holders of yen to start moving them into U.S. dollars anywhere below 100 yen to the dollar. I wrote about moving some of my money last Friday when I was able to buy dollars for only 95 yen. That was a smoking great deal, the best in 13 years, in fact. Just 16 months ago, the rate was 123!

Japan has an export economy and needs a weaker yen ASAP. The super cheap dollar is all people are talking about here. It gets more airtime than the Nikkei stock index being at 26-year lows. That’s why in a brief statement yesterday, the G7 finance ministers and central bank governors focused on the yen as a worldwide economic threat. The Bank of Japan is going to cut rates and the government will do whatever else is required to take the shine off the yen.

Translation: these bargain basement dollars won’t last long. If you have yen, get them into dollars pronto. The demarcation line at 100 is fast approaching. When we get back to 123, you’ll book a 26% profit on the trade — plus you’ll enjoy fatter U.S. interest rates while you wait to make the migration back to yen. You could do even better by buying cheap U.S. equities or real estate with your dear Japanese yen.

Which brings me to real estate.

I wrote in Spring 2007 that despite all the headlines saying how awful the real estate market was, I found few bargains on a property hunting trip to Colorado’s front range and Southern California. There were even competing bids on places of interest to me near Burbank. That wasn’t a buyer’s market.

It is now.

I’m making an offer on some horse property near Estes Park that listed for $390k a year ago. It’s a short sale situation currently listed by the bank at $190k. I’ll offer $150k, and be thrilled if they settle at $170k.

The place has a home that’s in good condition, ready to rent, and a functional barn. I’ll add some new fencing for horses and should be able to get around $1,300 per month rent. With current 30-year rates at around 6%, $170k minus a 20% down payment gets me to a mortgage of just $136k. The monthly payment will be only $815 per month, plus another $115 in property tax for a total of $930.

The result: I collect $1,300 to pay out $930 each month while watching the value of the property more than double in coming years.

The bargains are showing up. It’s time to get busy hunting for real estate.

Don’t let this phenomenal moment in economic history get away. Consider how you can get your fair share from cheap stock prices for the long haul, unprecedented volatility for short-term trading gains, a 13-year high in the value of the yen, and excellent real estate deals.

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